2016 (6) TMI 853 - HC - Income Tax

Eligibility of deduction under section 80IB - whether once the prescribed authority grants approval under subrule (2) of rule 18D of the Income Tax Rules, 1962, the revenue cannot deny deduction under section 80IB read with rules 18D and 18DA and thereby considering such grant of approval to be the sole requirement for granting deduction under section 80IB(8A)(ii) of the Act? - Held that - Once the approval is granted by the prescribed authority and such approval is valid, it would no longer be open for the Assessing Officer to verify the satisfaction of the conditions prescribed under rule 18DA in order to refuse deduction under subsection( 8A) of section 80IB of the Act. This however, does not mean that other issues relevant to the claim of deduction by the assessee would be taken away from the jurisdiction of the Assessing Officer. We do not share the anxiety of the counsel for the Revenue that interpretation that we have adopted would divest the Assessing Officer from examining any claim of deduction under the said provisions and grant deduction mechanically without verifying the claim. For example, in this very case, the Assessing Officer had doubt about the sample storage income being part of the income from eligible business. After hearing the assessee, he disallowed the deduction holding that the same does not form part of the income of the assessee s business of scientific research and development. In the result, while answering the question in favour of the assessee, we clarify that the power of the Assessing Officer to verify the claim of deduction is not taken away. He can certainly verify the accounts and refuse deduction which does not form part of section 80IB( 8A) and the income which does not arise out of the eligible business. He however, cannot ignore the approval granted by the prescribed authority and hold that the prescribed conditions are not fulfilled by the assessee. - Decided against revenue

Issues Involved:
1. Whether the Income Tax Appellate Tribunal erred in holding that once the prescribed authority grants approval under Rule 18D(2) of the Income Tax Rules, 1962, the revenue cannot deny deduction under Section 80IB(8A)(ii) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Background and Substantial Question of Law:
The appeals concern the interpretation of Section 80IB(8A) of the Income Tax Act, 1961, and Rule 18D(2) of the Income Tax Rules, 1962. The core issue is whether the Income Tax Appellate Tribunal (ITAT) erred in holding that once the prescribed authority grants approval, the revenue cannot deny deduction under Section 80IB(8A)(ii).

2. Facts of the Case:
The respondent assessee, a company engaged in scientific research, claimed a deduction under Section 80IB(8A) for the assessment year 2008-2009. The Assessing Officer (AO) questioned the inclusion of sample storage income in the deduction claim. The AO disallowed this part of the deduction, which was later taken up in revision by the Commissioner, who directed a fresh assessment, questioning the eligibility of the assessee for the deduction.

3. Tribunal's Decision:
The Tribunal set aside the Commissioner's order, stating that the prescribed authority's approval for deduction under Section 80IB(8A) should not be questioned by the revenue authorities. The Tribunal relied on decisions from the Bombay and Delhi Tribunals, emphasizing that the prescribed authority is an expert body whose approval should be conclusive.

4. Revenue's Argument:
The Revenue argued that approval from the prescribed authority is just one of several conditions for claiming the deduction. They contended that the AO must verify all conditions, and the Commissioner was correct in exercising revisional powers due to the lack of verification by the AO.

5. Assessee's Argument:
The assessee argued that the approval by the prescribed authority, an expert body, should be final and not subject to re-examination by the AO. They highlighted that the prescribed authority had refused to withdraw the approval despite the revenue's request.

6. Legal Provisions and Interpretation:
Section 80IB(8A) provides a deduction for companies engaged in scientific research, subject to four conditions. Rule 18D prescribes the authority for approval, and Rule 18DA lists the conditions for deduction. The prescribed authority, DSIR, grants approval initially for three years, extendable up to ten years based on satisfactory performance.

7. Court's Analysis:
The court analyzed the statutory scheme, noting that the prescribed authority is equipped to evaluate the technical and scientific requirements for approval. The court emphasized that once the prescribed authority grants approval, the AO cannot re-examine the fulfillment of conditions under Rule 18DA. The prescribed authority has the expertise and statutory power to grant, extend, or withdraw approval based on compliance with the conditions.

8. Conclusion:
The court concluded that once the prescribed authority grants approval, the AO cannot deny the deduction by questioning the fulfillment of the conditions under Rule 18DA. The AO can verify other aspects of the deduction claim, such as the inclusion of non-eligible income, but cannot override the prescribed authority's approval.

Judgment:
The court dismissed both tax appeals, affirming that the ITAT was correct in holding that the revenue cannot deny the deduction under Section 80IB(8A) once the prescribed authority grants approval. The AO's power to verify the claim is limited to ensuring that the income claimed for deduction arises from eligible business activities, without questioning the prescribed authority's approval.

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